In India, a home loan is the biggest expense one can incur. Once you have stepped into the property market, there is no backing off as the rates trend upwards. Hence, it becomes imperative to evaluate your needs and know which type of interest rate suits you better.
Everybody is confused about what should be their priority when they apply home loan – fixing the interest rate, making payment flexible, or paying fewer early payment fees.
Both fixed and floating interest rates have their benefits, and we will discuss factors to ponder before making a decision.
Fixed Interest Rate Home Loan
Fixed interest rates are set for a specific period, usually two or five years. Your mortgage rate will be reviewed and adjusted based on prevailing market conditions at the end of that period.
Fixed-rate home loan interest is suitable for those looking to lock in their loan amount and save money. The main benefit of fixed interest rates is that they allow you to plan your finances. You know what your EMIs will be and how much you need to pay each month.
Fixed interest rates also come with lower defaults than floating interest rates. This makes them a more reliable option for people planning on buying a property soon. You don’t have to worry about fluctuating interest rates and increasing payments in the future because they’re fixed.
The main disadvantage of fixed interest rates is that they usually have higher EMIs than floating interest rates. If you want to buy a house, it will take longer to save up enough money for the down payment if you choose a fixed interest rate over a floating one.
Floating Interest Rate Home Loan
A floating-rate home loan interest is one where the interest rate changes according to market conditions over time. The rate can go up or down depending on how much money lenders are willing to pay for mortgages at any time.
This makes it easier for people who plan on selling their homes soon because they do not know how long they will live there, so they may not want to make an investment that will tie them down.
Floating rate home loan interest is advantageous for people looking to refinance their home loans. These rates can be more attractive than fixed rates, primarily if you’re refinancing a mortgage with a high-interest rate. The ability to lock in a lower rate could save you thousands over the life of your loan.
The main advantage of floating interest rates is the ability to take advantage of lower rates when available.
With a fixed-rate loan, you know your monthly payment precisely. However, if you opt for a floating-rate loan, you can switch back and forth between different types of loans as market conditions change. You can then choose whichever type best suits your current needs and situations.
For example, if interest rates go down significantly during your first year with a new loan, it might make sense to switch from a floating-rate loan to one with fixed terms so that you can lock in those savings for the life of your loan agreement.
Which Interest Rate Is Better When You Apply for Home Loan?
Interest rates are critical in determining the cost of your home loan and your need to apply for it. A floating interest rate suits you best if you plan to sell your property soon, whereas a fixed interest rate suits you best if you’re planning to live in the property for a long time.
It is common for financial bodies to offer fixed and floating interest rates on home loans. The difference between the two is that the floating interest rate is pegged to the base rate set by the RBI, while the fixed interest rate remains constant throughout the tenure of your loan.
The financial institution decides the fixed interest rate when sanctioning the loan. Since there are different rates for different tenures, you can choose one per your needs and requirements.
On the other hand, if opting for a floating rate home loan, you need to check out its fluctuations before finalizing your decision.
A floating interest rate home loan allows you flexibility in choosing repayment options such as monthly EMI or EMIs based on tenure. However, it may also make it difficult to budget since it varies over time due to changes in interest rates set by banks and RBI policies.
To choose between a floating rate and a fixed rate home loan, you need to understand your needs and expectations better. Maintaining an emergency fund to cover expenses may be necessary without putting pressure on your loan amount. That way, you are reducing the risks of using a floating interest rate option and making yourself more stable financially in the long run. Choose the right home loan, apply according to your needs, and save yourself from any unnecessary surprises later!